Weathering recession: is it really true that we are in a better position than most?

The government claims that Britain is better placed than other major economies to withstand the global slump. The shadow chancellor, George Osborne, says the opposite is true. Osborne has the backing of the International Monetary Fund and the Organisation for Economic Cooperation and Development who think the recession in the UK will be worse than in most other countries because of the British economy's over-dependence on the City and the housing market, both of which are shrinking rapidly.

Unemployment

The Treasury argues that a flexible labour market and strong economic growth of recent years mean Britain is more resilient than other economies. This claim is about to be tested, possibly to breaking point. The problem with a labour market where people can be hired easily is that they can be fired just as readily. That means unemployment could rise rapidly to 3 million, as it did in the 1990s and 1980s recessions. Some experts say firms can cut jobs quite quickly, but that might ensure their survival and allow them to rehire rapidly when the recovery comes. Unemployment in Britain remains relatively low at 5.8%. The US is at 6.5% already while the euro zone, including Germany and France, is between 7% and 8%. Japan, though, is at 4%.

Economic growth

Britain was not first into recession. The euro zone officially went into one - defined as two consecutive quarters of economic contraction - on Friday, while Japan fell into recession yesterday. But the British economy is contracting quicker than others. The euro zone contracted by 0.2% in the third quarter from the second while Japan fell 0.1%. Britain was down 0.5% in that quarter and, were it not for a zero figure in the second quarter, the UK would be in recession already. The current quarter could see a big drop of 0.8%-1% for Britain.

Exports as a share of GDP

When the world was booming Germany and China had exports accounting for nearly half of GDP, compared with 21% in Britain and 8% in the US. But as soon as the global economy flagged Germany was in trouble because it had little domestic demand. China, too, looks to be slowing rapidly, with demand for its exports drying up.

Government debt

The government appears ready to cut taxes. That will push up government borrowing and national debt levels, as Osborne rightly points out. Britain, though, is in a relatively good position. Although its annual deficit is bigger than many countries in the euro zone, its overall debt position is favourable. If extra liabilities relating to Northern Rock and other banks are excluded because they could be paid off in the medium term, UK debt is at around 40% of gross domestic product, better than France, Germany and the US, which are at more like 60%, while Japan is at a hefty 180%.

Conclusion

We will not really know how resilient Britain is compared with other countries until we have come out the other side of the global downturn. In Britain interest rates are being slashed, the government is set to cut taxes and the falling pound should help exporters. Against that are high personal debt levels, while house prices still have a long way to fall. These could keep the economy in the doldrums for a long time, irrespective of how much policy stimulus is thrown at it.